Further signs of improvement in US, German and Chinese economies offered further support to the current market rally, as did relief on the US debt limit front.

In Washington, the Republican-led House agreed to suspend the government’s US$16.4 trillion debt limit until May. The move – which still requires White House and Senate sign-off – allows the US to keep paying its bills and gives lawmakers breathing room for long-term budget talks. It also takes a big question mark off the table for traders who cheered the move. Markets also responded positively to lower-than-expected new applications for jobless benefits south of the border. The number fell to the lowest level in five years and now stands where it did in January 2008. Positive economic data also came out of China that showed manufacturing expanding at the fastest rate in two years. The latest read has the Purchasing Managers’ Index growing to 51.9 in January, from a predicted 51.7. Germany added to the flow of upbeat data as its business confidence survey rose for the third month in a row in January and hit a seven-month high. Meanwhile, earnings season continues to unfold in the US which provided a positive backdrop for further gains on the week. Finally, the Bank of Canada kept its policy rate unchanged at 1% this week.

Markets

North American stock indexes breaching previous highs

The TSX exceeded its 52-week high and reached levels last seen in mid-summer 2011 this week. For the four-day period covered in this report the TSX added 98 pts. to close at 12,823. The Dow and S&P 500 also advanced with both breaching territory last visited in 2007. Over the US holiday-shortened trading week, the S&P 500 added 9 pts. to reach 1,494, while the Dow moved higher by 176 pts. to close Thursday at 13,825. Meanwhile, the NASDAQ fell 4 pts. to fall to 3,130; still within 65 points of values last seen in 2000.

Scotia’s Recommendation

Investors should be reducing bond exposure and shifting toward equities on any stock market weakness

Equities - Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “Hurricane Sandy and fiscal cliff uncertainty represent potential downside risk to US Q4 earnings. While we remain bullish on equity markets for 2013, stocks have already posted solid moves so far in 2013 and any number of catalysts, including Q4 earnings and debt ceiling worries, could trigger a short-term pullback. We would treat market weakness, if any, as a buying opportunity.”

Fixed income - Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

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